Health Check: How Prudently Does Top Spring International Holdings (HKG:3688) Use Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Top Spring International Holdings Limited (HKG:3688) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Top Spring International Holdings

What Is Top Spring International Holdings's Debt?

As you can see below, Top Spring International Holdings had HK$7.33b of debt at December 2023, down from HK$7.75b a year prior. On the flip side, it has HK$668.0m in cash leading to net debt of about HK$6.66b.

A Look At Top Spring International Holdings' Liabilities

Zooming in on the latest balance sheet data, we can see that Top Spring International Holdings had liabilities of HK$6.62b due within 12 months and liabilities of HK$5.30b due beyond that. Offsetting this, it had HK$668.0m in cash and HK$245.3m in receivables that were due within 12 months. So it has liabilities totalling HK$11.0b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the HK$550.5m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Top Spring International Holdings would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Top Spring International Holdings's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Top Spring International Holdings had a loss before interest and tax, and actually shrunk its revenue by 74%, to HK$954m. That makes us nervous, to say the least.

Caveat Emptor

While Top Spring International Holdings's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable HK$550m at the EBIT level. Reflecting on this and the significant total liabilities, it's hard to know what to say about the stock because of our intense dis-affinity for it. Sure, the company might have a nice story about how they are going on to a brighter future. But the reality is that it is low on liquid assets relative to liabilities, and it lost HK$877m in the last year. So we think buying this stock is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example Top Spring International Holdings has 3 warning signs (and 2 which can't be ignored) we think you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.